Category Archives: Incentives

It is said that beauty is in the eye of the beholder. I guess it can also be said that the best solution is also in the eye of the beholder. It probably also depends on who you ask. The problem is that the best solution depends on the relative criteria associated with the issue that requires a solution. It also depends on the lens that each individual looks through when they are trying to craft a solution.

Abraham Maslow was an American psychologist who was most notably remembered for his ideas on the hierarchy of human needs. That in and of itself is pretty cool in my book, but that is not why I am citing him here. He also said:

“if all you have is a hammer, everything looks like a nail”

and variants thereof, which is from Maslow’s The Psychology of Science, published in 1966.

And here-in lies the issue.

What seems to occur is that if you are trained as a lawyer, you are taught to view every issue from a legal standpoint. If you are a marketer, you view every issue from a marketing point of view. If you are in finance it is always about money. The view you have of business influences the view you have of issues and their respective best solutions. And so on.

This is absolutely the case for engineers. It seems that if you are an engineer, everything is an engineering problem, and therefore an elegant engineering solution is probably not only possible, it is highly desirable. For engineers, it doesn’t seem to matter what the specific issue criteria are. Topics such as cost and time required take a back seat when it comes to engineers. It always comes back to engineering the best engineering solution.

For those of you (like me) who are not engineers, and who have argued with engineers in the past, you will probably very clearly understand the following. For those of you who have not yet had the opportunity to argue with an engineer, be patient. I am sure that you will get your opportunity to argue with one in the near future.

There is an old saying regarding arguing with engineers. It is so old that no matter how I researched it (two or three variants of searches on Google) I could not find any direct attribution as to the original author. The saying goes:

“Arguing with an engineer is a lot like wrestling with a pig in the mud. After a while you realize that the pig is enjoying it.”

But I have digressed enough. With the possible exception of noting that engineers are usually much more associated with costs than sales. I’ll get to that in a moment.

The point that I am trying to make here in my own clumsy way, is to point out that regardless of what the defined criteria may be regarding an issue’s potential solutions, we all have a bias as to how we would go about creating our best solution. This type of bias has a specific psychological name: confirmation bias.

Between my earlier discussions regarding Maslow, and now confirmation bias, I seem to have taken on quite a psychological bent here.

Shahram Heshmat (Ph.D.) in his blog states confirmation bias occurs when we have formed a view on a topic, we embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it. Confirmation bias suggests that we don’t perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. Thus, we may become prisoners of our assumptions. (https://www.psychologytoday.com/blog/science-choice/201504/what-is-confirmation-bias).

I brought this idea up to an engineering friend of mine. He said every problem should be viewed as an engineering problem, and started arguing with me again. Having just cleaned the mud off from the last time, I didn’t engage.

Confirmation bias is an interesting topic when it comes to management, leadership, and issues. This is especially true when it comes to looking at two very important aspects of any business: sales and costs. I will hedge my comments here with the qualifier “for the most part” in that there are definitely exceptions to every generalization. But for argument’s sake, I will go ahead and generalize a little.

When it comes to setting sales targets, who sets the goals?

Those of you that said sales are wrong.

Management usually sets the sales goals. They ask for bottoms up forecasts and expectations from the sales teams, which they will usually review and find lacking in that they do not meet the financial and or growth expectations for the company. They will then ratchet up the targets to be more in line with the company’s needs and requirements, and issue them to the sales team to achieve.

The confirmation bias here is that management believes and expects that sales will provide them with a lower set of sales forecast targets because it provides the sales team a higher probability of achieving those targets. When sale provides a forecast, regardless of its veracity, that is lower than management expectations, this bias is confirmed.

I really don’t think I have ever been part of an organization where the sales team ever provided a sales forecast which was greater than management expectations. Perhaps my own confirmation bias is that management sales expectations will always exceed the sales team’s expectations, regardless of the market conditions.

On the other side of the spectrum lie costs. When it comes to setting costs, it is usually engineers that set them. While there is usually a similar process of setting up costs and budgets associated with products and services (I am not going to look at specific disciplines or functional groups here, just the costs associated with deliverable products and services) where the cost groups (usually containing at least some engineers) are consulted regarding their input into the costing model.

Herein is where the processes begin to diverge. Management has the ability and bias to step in and alter or impose their sales demands on the sales experts, but does not have nearly the same inclination to alter or impose their wills on the cost experts and groups.

Their confirmation bias is that the cost groups are doing their very best to keep costs low, even though the cost group has the same rationale as the sales group when it comes to setting targets. Higher cost targets for the cost group are obviously much easier to achieve than lower cost targets.

The resulting higher costs drive higher prices and a sales team that is invariably told to “sell value, not price”.

This may have been an acceptable mantra when there was discernable value (and price) differences associated with products and services. In some instances, there still may be, but the race to the bottom regarding minimally acceptable product quality and service levels at the lowest compliant price seems to have mitigated all but the basic pricing and functionality topics as differentiators.

Customers do not particularly care what a supplier of products or services costs are. They care about the supplier’s price. And quality. In that order.

A colleague of mine mentioned that the incentives and commissions associated with sales incite the striving behaviors associated with good sales teams, while there is no similar incentive plan in place to incite a similar striving approach to reducing cost budgets for the cost groups. Sales teams make at least partial commissions, proportional to their sales target achievement, even if they don’t fully meet their sales objectives.

Perhaps it is time to rethink the compensation plans associated with the cost teams so that they more accurately reflect the need for continued cost budget reduction instead of the current cost budget achievement structure.

Nominally the market sets the price for a good or service. The market is made up of customers. Even Apple with its ubiquitous iPhone faces market challenges from the likes of Samsung, LG and other smartphone producers. If Apple raises its price too high they risk losing share, and profitability to competitors.

Apple is immensely profitable. They are also a veritable tyrannosaur when it comes to working and controlling their costs. If you don’t believe me, try becoming one of their suppliers and selling them something. I have been a part of organizations that have done this. It can be a challenge, to put it politely.

It would seem that Apple’s culture may have evolved out beyond the confirmation bias dichotomy associated with sales and costs to the point where they continue to challenge themselves with respect to their cost structures, and engineering solutions. They seem to have created a market cache, expectation and demand that may have enabled them to restructure their cost model focus in order to maximize their profits.

That is truly speculation on my part, but it is a theory that would seem to be supported by the empirical observations of them in the market.

Companies that are looking to maximize their profit potential probably need to do a little internal analysis to understand their own costing processes and capabilities. There are many that are still looking at them from a bottom up, confirmation bias based point of view. Apple has recognized that their costs and their product price really have very little relationship and should be treated as almost totally unrelated items.

This approach would allow product and service providers to focus on their sales strategies and their costs strategies in separate, but similar ways. It would seem that the best solution has proven to be to engineer your products and services, not your costs, and instead to treat your costs with the same type of aggressive objective setting that you treat your sales.

I saw an article in a local newspaper today, and as usual it got me to thinking. The article was about a high school that would not allow its National Honor Society members to wear their honor society sashes during their graduation commencement ceremonies. The school district decided that it did not want those graduating students who were not part of the honor society to feel excluded or lessened for not having been an honor society member.

Think about that for a moment.

Kids that excelled were not allowed to be recognized for excelling because of the way it might make those that did not excel feel.

Now I am sure that there are many twists and turns in this story that we have not been a part too. It is my understanding that the National Honor Society is viewed in some schools as more of a “club” due to its non-school requirements and activities. Even so, if only part of this story is true, what would happen in business if business was forced to behave in such a manner with those who excel?

Now before I delve too deeply into this topic from a business point of view, there probably are a few things that we need to remember. I think it is best for us all to remember that each and every business only wants the best, the brightest, the most gifted on their team. They have all implemented interview and selection criteria to make sure that no average person darkens their halls. They spare no expense in their never ending hunt for only the best talent.

Once each business has assembled their own veritable “Avengers” (the first one, where they save the world, not the second one where I’m not sure what they actually did…) slate of employees, they then require that each manager force fit them into a bell shaped distribution curve for their individual performance so that individual ratings and raises can be allocated appropriately.

Wait a minute. In some strange way that actually does sound a little like the high school in question.

Let’s get back to the topic and talk about recognition in business for a little bit. It is, or at least should be an integral part of any employee compensation or retention program. The problem is: How do you recognize those that have excelled without potentially demoralizing or alienating those that may not have done as well. I think that this can be an interesting question on several levels.

The first level is to make sure it is an organizationally acceptable practice to publically recognize individuals. All cultures have a tendency to impose their view of things on the world. I think in the US we are somewhat competitive, understand and accept the concept of individual recognition in a team oriented organization. There are other countries with similar views of things, as well as some that tend to take a little more “team” view of things as opposed to individual performance. Many of us look at it as a reason to work and strive that much harder in order to reap those individual gains.

This is particularly prevalent in many of the sales organizations. Sales incentives, sales rewards, sales trips and recognition are all part of the package. Many sales people, in addition to the compensation, see the opportunity to be recognized for excelling in front of their peers as one of the primary driving incentives for their work.

For the most part, this is how sales recognition works. There is a focus on achievement and those that excelled. There is minimal concern about the feelings of those that did not. All sales people are at the sales meetings. They all know if they achieved or not. If they did not attain the required threshold they had no expectation of being recognized in front of their peers. Their expectations were set long before the recognition was provided.

The advantage of sales in this sort of situation is that it is a very quantitative objective. You get the numbers or you don’t. If you get them, wear a nice suit when you walk on stage in front of your peers. If you don’t, try to sit toward the back in audience and remember it is bad form to make snide comments about those on stage.

However, that may not be the case in other locations or business disciplines. How do you recognize the best accountant? I mean really, how do you recognize them? Do they add their numbers that much better? This is where the recognition ideal starts to run into trouble. Just like the Russian judge in the ice skating competition that seems to have preordained the winners regardless of their performance, when you introduce a human factor or “judgment” into the recognition algorithm you open it up for perceived issues and abuse.

When a recognition program moves away from a quantitative approach to valuation, it begins to move away from rewarding for what is actually getting done and starts to enter the realm of rewarding for how things are getting done. How things are said becomes more important than the content that is contained in the communication.

There is in essence now a question of who gets to go up on stage in front of their peers. Some accountants may feel slighted because they actually added more numbers correctly than the accountant that was selected to be recognized. Others may feel slighted because they were associated with subtraction functions and everybody knows that only the addition guys get all the recognition.

It is in an instance such as this that a recognition program can in fact become a disincentive to those that are not recognized. If there is something other than a pure performance based criteria there will always be the suspicion that the Russian judge had preselected the winner.

Another issue associated with recognition can be culture. In some cultures individuals like to be recognized for the contribution, but they may not want to be recognized publically in front of their peers for their contributions. Some cultures prefer a more individual based one-on-one recognition. A direct word from the leader or a personalized congratulatory note on a job well done can be preferred to taking a bow in front of one’s peers.

This again is a good way to avoid the perceived snub or demoralizing effect associated with those not receiving the recognition. A simple acknowledgement or a small token of appreciation from the business leadership without all the pomp and circumstance (that’s a high school graduation reference in case you missed it) can readily serve as way to recognize those that have excelled.

It’s no secret that recognition is an important aspect of business and team morale and satisfaction. If there are going to be public recognition programs they need to be as quantitative in nature as possible. If all participants are aware of the recognition criteria thresholds, then there usually cannot be any issues generated by those that are not recognized.

Regardless of how unbiased or expert management may feel it is, when any sort of “judgment” is injected into the recognition process there will be a segment of the business or team that will feel someone else may have been unfairly selected. This can result in a set of responses and behaviors that are contrary to the desired culture of inciting achievement.

In looking at recognition based rewards for those disciplines where it is possible to implement quantitative thresholds, a public recognition programs as part of the rewards function could be preferable. Everybody knows how they have done with respect to their objectives and there should be no hard feelings for those that know they did not perform as well as others.

For those disciplines where it may be difficult to solely gage performance quantitatively, it may be preferable to look at more individual based methods of recognition. Those that are selected for recognition can receive it directly and those that are not will not feel excluded or lessened for not receiving similar recognition.

Very much like the high school students at the graduation ceremony who won’t be feeling bad because there will not be the public differentiation between them and the National Honor Society graduates who were not allowed to wear their honor society sashes with their cap and gowns at the graduation ceremony.

I was having a discussion with a friend the other day, and he made an interesting comment. He said that we were now in the day and age where a man could go and do what he likes to do, and what so many others had done before him, but now could wake up the following morning and have ten million people worldwide, hate him for doing it. He was referring to the hunter who killed the lion a few weeks ago in Zimbabwe, Africa. I think his name was Cecil. The lion, not the hunter.

Here is a man that has lived his life in relative anonymity, at least with respect to the ten million people worldwide that now hate him. He had gone about his business (as a dentist I think), and probably conducted and acquitted himself well. He must have, otherwise he wouldn’t have been able to afford the relatively astronomical costs of flying half way around the world to pursue his desire to hunt big game.

He had been doing it for years (Big Game hunting that is). By several accounts he was very successful at it. Others have also been doing it for years. There are a lot of people around the world that do this. It is also a significant source of income for Zimbabwe in the form licenses from the state and fees for guides, and the costs associated with outfitting the trip. It is the commerce of big game hunting. There is a lot of money involved, and remember that Zimbabwe got paid all their fees well before Cecil got shot.

I also remembered (and through the wonders of Google went back and verified) seeing pictures of the famed author Ernest Hemingway on the cover of various magazines posing with various dead lions, leopards and water buffaloes that he had shot while big game hunting in Africa. He was also a big game hunter. Nobody thought Hemingway was a schmuck for shooting them. On the contrary, he had an image as a man’s man.

I suspect that none of the animals that Hemingway shot had a name though. It was probably a time where people didn’t name wild lions.

This is what happens when you shoot the wrong lion.

People also didn’t seem to mind nearly as much when Ahab went after the white whale that they named “Moby Dick”. That could possibly have been because that was an instance where the big game trophy fought back and actually won. I suspect that Moby was also probably not some country’s national pet.

Now back to the topic. Here was a man from Wisconsin, who flew half way around the world. He complied with all the legal requirements of Zimbabwe, hired a supposedly knowledgeable guide, and achieved his goal of shooting a lion. He didn’t break any laws. It appears that he was in an area where it was legal for him to shoot a lion. He had paid for all his licenses and permits. As I said, he just shot what turned out to be the wrong lion.

Now ten million people hate him. He is in hiding and can’t go back to work, which he obviously must do if he ever expects to be able to afford the now increased prices that Zimbabwe is charging for big game trophy hunts. It seems that everyone else who wants to hunt big game in Zimbabwe will also have to pay these higher fees, not just dentists from Wisconsin.

So, what does all this have to with anything?

I draw several parallels to business from all this. The hunters in business are usually called sales people. They are the ones that go out into the field, search out the opportunities and try and bag the mythical big game creature known as an “Order”. This is what they are paid to do.

As we all know, orders are the life-blood of any business. But not just any orders. It is orders for products and services that the business can actually supply that are desirable. It is also desirable that these bagged orders come with requirement of profitability. That means that by getting these orders the business can sustain itself and hopefully grow.

The guy who shot Cecil wasn’t doing anything like this. Shooting Cecil wasn’t going to enable the dentist to sustain himself or grow in any appreciable way. I don’t think that you can actually eat lion meat. At least I have never heard of it. He was shooting Cecil because for whatever reason, he wanted to be able to say he had shot a lion (in general, I think Cecil was just the unlucky individual).

What this brings up, is what should be the first law of hunting: If you don’t want someone to do something, don’t make it legal, or allow them to do it. If you don’t want the hunters to bring you undeliverable or unprofitable orders, make a rule or law that indicates this is not acceptable behavior.
If you don’t want Cecil specifically to be shot, make a law that says you cannot shoot lions. Cecil was a wild lion. He was in the wrong place at the wrong time and a dentist from Wisconsin shot him. It could have easily been prevented if Zimbabwe had just said:

“We no longer allow anyone to shoot any of our lions, regardless of the foolish amount of money they are willing to spend or offer us to do so.”

The second law of hunting should then follow on or corollary and be: If something is allowed, or not specifically disallowed, don’t get mad at people when they do it. Hunters are focused on the goal. Bag the order. Bring down the target. If you are not specific about the type of orders to get and the requisite behaviors to be demonstrated during the hunt, you cannot be unhappy when improper, or undeliverable, or unprofitable orders are presented.

Zimbabwe had said in effect:

“You can hunt our lions.”

They didn’t say you could hunt every lion but Cecil. They did say you couldn’t hunt lions in certain areas, and to my understanding those areas were actually avoided by the hunters in question. I guess nobody ever thought that a wild lion in his right mind would ever leave a protected area where he couldn’t be hunted and wander into an unprotected area where Wisconsin dentists were hunting lions.

I think what we have learned from the adventures of Cecil and the dentist can probably best be described as the third law of hunting: In sales, like big game hunting, trophy hunting is probably not a good avocation.

In sales there are those that hunt orders to sustain and nourish the business. As I said, these orders are the life blood of the business. There are very few if any of these orders that are mounted and put up on the wall where people can come in and see what a ferocious order was bagged.

And like sales in this instance there are hunters who actually utilize hunting as a way to provide sustenance to their family or group. I don’t think anyone can have an issue with this type of hunter. However in the instance we are discussing, I don’t think this was the final disposition of Cecil. I believe he was destined to end up as either a rug or in a semi-ferocious mounting on the wall of some dentist’s office.

One of the best ways to tell if a sales person is trophy hunting or not is if they use the phrase “Strategic Business”. If they use this phrase, chances are that they are either looking for a lower price or trying to mount some sort of big game trophy on the wall, as opposed to actually doing the business that the business needs or may want. In that way trophy hunting doesn’t really serve a purpose in business. It may provide a nice visual for a wall but it doesn’t provide any value to the business. If it doesn’t provide a value, why do it?

If the dentist in Wisconsin knew this earlier, he probably wouldn’t have shot Cecil, and definitely wouldn’t be hated by ten million people, worldwide now.

I started off my business career in sales. I admit it. It’s not something I am particularly proud of…come to think of it, it is something that I am particularly proud of. I can honestly say that I spent time in one of the most difficult professional disciplines around, the professional discipline of trying to get someone to give you their money. I learned a lot in sales about dealing with customers. I also learned a lot about dealing with the internal mechanisms of the company that I worked for as well. I thought that any customer that I could make a deal with and get an order from was a good customer. As I have progressed through my career I have learned that not all deals and customers are good.

For the average salesperson an order is an order. The more of them you get, the more commissions you get. The more commissions you get the more money and personal esteem you acquire. Along with this comes better houses, cars, big screen TVs and along with the laws of natural selection an increased opportunity to pass your sales DNA along to future generations of sales people. In case you missed it, sales is a jungle.

The ideal sales deal is that you provide your customer with something they need, a product or a service, and they provide you with something you need, primarily money. As long as everyone keeps this sort of exchange arrangement in mind things normally go well, and for the most part they usually do.

Occasionally however there have been recorded instances where things didn’t go well. Many of these sorts of instances are attributable to honest mistakes or misunderstandings and the preponderance of them can be cleared up by honest and diligent work by both parties associated with the deal.

Then there are the outliers. Those deals that you have entered into that despite the fact that you’re doing everything right, either one or both of the parties to the deal are unhappy. Either the customer is not getting what they wanted, or you are not getting paid. Sometimes both. What do you do?

The first step is to find the nearest Home Depot store. Go there and go into their Bathroom / Plumbing section and find a really nice mirror. Buy that mirror, take it to your office, hang it on your wall and spend some time looking at and questioning the person in that mirror to make absolutely sure that you are in fact living up to your end of the deal. Try to look at the person in that mirror from the customer’s point of view. Have you told the customer everything the need to know? Have you done everything you need to do? Start with you.

If you have completed step one and are reasonably confident that you and your team are providing all the entitled goods and services to both the letter and the spirit of the contract then the issue may in fact lie on the other side of the deal, with the customer. This is usually a pretty rare, but not an unheard of event. You may have a customer that through either the normal or abnormal conduct of their business is difficult to deal with.

I have not had to deal with this sort of situation very often thank goodness, but when I have it has normally fallen into one of two categories: it is either a very small customer that for whatever reason has been forced into a position where they cannot adhere to the deal they made, or a very large customer who feels that they are either such a desirable customer or so dominant in their market that they do not feel that they have to adhere to the deal they have made.

Of the two scenarios, I prefer the first one. A company that can’t honor the deal for the most part will be willing to work with you. There may be a solution out there where the deliverables of the deal can be altered to where both parties can be addressed. A small customer company by its nature can be a fragile enterprise. There are risks associated with dealing with them. They will however usually try to work with you.

On the other side of the spectrum is the large company. These are companies that understand the role and position in the market and use it as leverage against all of their suppliers. If you want their business then they feel that you will have to play their game. Most customers want their partners to make a reasonable profit. This usually assures them of a continued available supply of the good or service that they want or need. Some however just want the deal now and will not care if you are around for the next one or not. They know there will be someone else there if you are not.

The usual response to this tactic is for the organization to agree to the terms because the organization decides that it wants the business bad enough, and the size of the business is large enough to warrant an agreement. There will usually be pressure from the sales team trying to convince everyone of the strategic nature of both the business and the customer in question, and how the profit will be made up on the next deal.

It never happens that way, and there is nothing strategic about unprofitable business. I have addressed this topic specifically in the past. You can talk yourself into just about any kind of business, but you cannot talk yourself into profitability.

Once you are into one of these types of deals where the customer is obviously leveraging you there are only a limited number of things you can do: You can look for a legal way out, or look for a way to minimize the damage and exposure while you meet your end of the agreement. After all, you signed it.

Exiting a deal because you don’t like the terms of a contract you signed is usually only an option of last resort. Unless you have been demonstrably misled by the customer, this really isn’t an option. But it is also a financial decision as well. If the fines and penalties for leaving the contract are less that than the losses expected from continuing, it needs to be reviewed.

That usually leaves buckling down, trying to reduce all costs associated with the deal in question, and then getting out at the earliest legal time. Issue the exit / cancelation notification and don’t take any argument from the sales team or customer. These are the teams that were responsible for the deal in the first place. Don’t allow them to prolong the inevitable.

Be polite. Be firm. Be gone.

Sometimes bad contracts are expensive opportunities to learn lessons. Other times they can just be plain expensive. They can be lessons about markets. They can be lessons about sales teams and their compensation incentives. They can be lessons about specific customers. The important point is that they need to be lessons that are learned.

If you have only a contract or two that fall into this category then they could be an anomaly. If you have multiple bad deals in a specific market or with a specific customer, you need to learn how to de-risk those types of deals, or avoid those specific markets or customers.

If you have multiple bad deals across multiple markets and customers, then you have a sales force issue, where their objectives and incentives are not aligned with the profitability objectives and requirements of the company. This is a key point. If you have a number of bad deals you have an issue with your sales team and their compensation plan. You probably need to make sure that the sales team has some sort of margin or profitability goal associated with their compensation in order to avoid this situation.

Regardless, the only person responsible for a bad deal is the one that agreed to it. Don’t sign a bad deal hoping you can make it better. Don’t specifically blame the customer, but if they are unwilling to create an agreement that is at least fair to both parties you need to remember and learn from it. Learn from it and put the processes in place to make sure it doesn’t happen again.

“Strategic” business is an interesting concept. It is normally used by sales teams to denote business that is believed to be so important as to be opportunities that are categorized as “Must Win” business regardless of the costs. This can be due to the size of the business, the desire to obtain market position or to keep a competitor from obtaining market position, or any number of other good, well meaning reasons. In my experience the one characteristic that all “Strategic” business has in common is that it is unprofitable.

Strategic business is invariably the sales code phrase for “We want a lower price.” There may be competitive reasons for the desired lower price. There may be higher costs associated with the opportunity that customer doesn’t wish to absorb or pay for. There may in fact be increased competition. There may be expectations by the customer for greater savings. The list can go on and on. The point here is that none of these reasons are strategic. They are tactics, either by the sales team or the customer, to get a lower price.

The strategic business approach can also be seen when a large multi-product supplier is dealing with a large multi-product using customer. The idea posited here will be if a lower price is obtained for one product it will be to the benefit of all the other products that are being sold to the same customer.

Wait a minute, how does that go again?

I am of the opinion that all business is important and that all business should be profitable. It would seem in this scenario that some business is less important that other business. In this case it would appear that it is the Profitable business that is less important. After all, it’s not strategic. How do you decide which business is going to sacrifice its profitability for the sake of the other businesses? How do you prove the linkage between the unprofitable strategic business, and the profitable non-strategic business? Does the supplying company recognize that one (or more) of its businesses has been positioned and priced as a strategic business and measure its performance accordingly?

Strategic plans are those business plans where the growth and profitability for the business are mapped out over a longer horizon (usually 3 to 5 years). They provide directions and goals. They focus on the growth of both revenue and profitability of the business as well as the evolution of older products to newer ones. Strategic business, if there truly is such a thing, should also be focused on the long term growth of both the business revenues and profitability. It would seem that strategic business would only be associated with new products, new revenue sources and the new profitability associated with them.

Under these types of definitions for strategic business, it is very hard to justify any type of unprofitable business as strategic, particularly for existing products or services. I have said before that customers associate value with that which they pay for. If you provide goods and services to them at reduced prices then they will assume going forward that those goods and services have a reduced value. If strategic business is based on longer term future growth, do you really want to grow what has now been priced to the customer as an unprofitable business?

If there is value to your customer in the goods or services that you are providing them, then you should be entitled to a profit margin. It is the profit margin that enables you to pay your costs as well as look for new goods and services to supply your customers in the future. This is the basic tenet of business. Customers will continue to apply pressure for lower prices. Competition may also generate downward pressures on prices. As a provider of the goods or services you will continue to try and find new ways to reduce costs and to become more efficient. Downward price pressure and the ability to remove costs and increase efficiencies of the business will eventually hit the point of diminishing returns.

I have talked in the past about the need to prune products and services from the business portfolio when they have reached an end of useful life scenario. Part of that end of life decision is based on the time when either your customer will no longer pay you an appropriate price where you can generate a reasonable margin, or your costs are such that you can no longer reduce them to the point where you can generate a competitive price at a reasonable margin. As I said earlier, if there is value the customer will pay for it. If there is not enough value to the customer for them to pay for it, then the supplier should no longer provide it.

If you have an existing product, service or business where you are having problems generating the prices and margins that are needed for viability going forward, there may be a push to look at the “strategic” importance of the product, service or business for the “greater good” of the company. These types of discussions ring hollow. There is nothing strategic about unprofitable business for existing products and services. Each product, service and business needs to be able to stand on its own and justify its future viability based on its own revenues and profitability. Unprofitable “strategic” business is still unprofitable business.

One way to make sure that strategic business is in reality profitable business is to align the revenue objectives of the sales team with the profitability objectives of the business. Some business opportunities are more valuable (more profitable) than other business opportunities. If the sales team is rewarded for more profitable business, and is not rewarded for less profitable business, the focus will be placed on profitability and the more profitable business. Strategic business will either need to be profitable, or it will no longer be so strategic.

With the beginning of the year comes the phrase that
while maybe not striking fear in the heart of a leader, will definitely elicit
a wince, or two. It’s time for annual reviews for the previous year, and the
setting of individual objectives for the New Year. This event normally ranks
right up there with root canal on the fun scale for a leader.

Despite my poking a little fun at how the process mat
be perceived, it is a very important process for the successful business. Set
the goals too low and you bog the business down because goals are achieved to
easily or to early. Set the goals too high and you run the risk of the team not
giving a full effort for a goal that is seen as impossible to achieve.

Another aspect of goal setting that is often
overlooked is that of materiality. We have all been recipients of the dreaded
“corporate” objective. That is the overall corporate Revenue, or Profitability
goal. While this may be a suitable goal for a division or business leader, at some
point in the hierarchy it does become meaningless.

Goals are only useful if the individual that the goal
is set for as the ability to achieve or affect the achievement of that goal.
Many will argue that everyone in the corporation has the ability to affect the
achievement of the corporate goal. This is where the idea of materiality comes
in. The entry level specialists may be able to contribute to the corporate goal
achievement, but their “rating” on this objective will be largely dependent on
the work and decisions of those managers and leaders above them.

“Corporate” goals bring down the performance of your
highest performers and mask and bring up the performance of those on the lower
end of the scale. An example would be if the performance of the leader (and
team) of a higher performing smaller division, would fail to get a bonus or an
appropriate review based on not achieving a corporate “objective” because a
larger, poorer performing division brought the overall corporate performance
down.

It seems to have long been held that if the entire
corporation did not achieve their goals then no one in the corporation could be
said to have full achieved their goals. In reality in this situation there are
always those that have achieved or exceeded their goals. It is just that their
performance has been masked by another group that has not. In this case the
higher performers have been lumped in with the lower performers, with little
opportunity for financial differentiation between them.

So, as the Novocain from the
root canal wears off, and the inevitability of having to set the individual
goals for the members of the team looms large, remember; Try not to set the
goals too low or too high, and make sure that the individual can in fact
achieve, or affect the achievement of the goal. In many instances this will
mean No Corporate Goals.

In my last article I discussed the concept where employees have asked for some sort of incentive or reward for their participation in the generation of new ideas that would help the company. It was my view that incentives and rewards should be based on the value that is produced and results generated by the implementation of an idea (revenue, earnings, etc.), not the subjective value of the idea itself. It did get me thinking though….

What has occurred in business that has caused this sort of request to even be made?

Do we need to put incentives, or better put, more incentives in place to encourage each specific or incremental request or behavior? Have we reached a point where we all believe that our salary or wage is an entitlement?

This is tricky ground. I believe that there are numerous issues that have and do contribute to this evolving situation. Knowledge worker allegiance has shifted from the company to themselves. There are many reasons for this but I believe its roots are in the market boom of the 1990’s when employees changed companies with almost great regularity in order to receive ever higher compensation. They focused on their own best interest.

Company allegiance to it employees has been changed under the combined pressures of cost reduction (including both true staff reduction and the drive to outsource functions to low cost labor locations), the demands of stockholders for improved stock value, and the prolonged downturn in the general economic conditions. The company too is focusing (maybe more so now than in the past) on its own best interest.

It seems that what was a somewhat mutually supportive relationship between the company and its employees may have become somewhat more mutually adversarial. That could explain why companies only want to pay for what they quantifiably get, and employees only want to do what they are quantifiably paid to do. This could explain the employee requests for incremental incentives for every company incremental work/output request. I am not entirely sure, and I will think about it some more.

I am a big believer in the alignment of objectives, goals and incentives for a business to achieve its maximum potential. If everyone is working toward the same goals and is compensated on those items that bring the most value to the business then you should have a structure that is both efficient and focused. Is that enough?

I was on an organizational wide call where there was a general discussion regarding the business structure and potential new opportunities in the market, and how to most effectively and efficiently pursue them. The group conducting the call was asking for input and ideas from the team based on the fact that the team members were the ones closest to the markets and issues and should therefore have some of the best ideas how to deal with them. This made sense to me.

It then took a strange turn. Members of the team then asked “would there be any incentives put in place based on their generation of ideas?”

Now I understand that incentives are designed to try and generate desired behavior, but where do we cross the line and start asking for incentives for people to “think”?

My logic here is that if you can come up with a better or more efficient way to do your job, you should implement it. If it truly is better, you should be able to exceed your existing objectives and then be compensated better based on the current incentives associated with your role. This is what you are paid for.

We are all essentially knowledge workers. We should try to generate the maximum value for our businesses possible. We do this by applying our knowledge to the best of our abilities. Incentives should be based on the output generated from the application of knowledge and ability, not the application of knowledge and ability itself.

A good friend of mine, John Schlueter, provided me with some topics for this blog. Here is one of them.

If you go to a restaurant and the waiter is late with your order, and you can see that he is working very hard in a busy section with many demanding customers, will you still tip him?

Most of us, pretty much without exception will tip the waiter based on the situation and the obvious effort he is putting out. Unfortunately in a performance based role such as management, or sales, this would not be the case.

In past sales roles there have been years where I have worked some of my longest and hardest hours pursuing sales, only to be not rewarded when the sale did not come in. Everyone knew how hard I was working, that I had difficult customers and significant competition. It didn’t matter.

I didn’t get a “Tip”(commission).

A “tip” is an incentive commission to drive a desired behavior in business. It is not an entitlement.It is there to drive a desired outcome – either fast and courteous service, or achievement of a sales objective – as the case may be.

Despite that position, I would still probably leave a tip, but I have been in roles where my bosses didn’t feel that way at all.